Banks Slowly Regain Trust in CRE

Abandoned after the financial crisis, commercial real estate (CRE) is once again becoming fertile ground for loan growth.

Intense competition with bigger banks over commercial and industrial loans has some community bankers reconsidering how much they want to engage in a price war for such loans. That reluctance has allowed less-competitive commercial real estate lending to slowly make a comeback.

Banks that are equipped to make CRE loans can pick and choose clients and can often make loans at more favorable pricing than with C&I loans. The key, however, is better underwriting, in order to avoid repeating past mistakes.

"We find that the pricing for the commercial real estate portfolio is higher than it is for C&I," says Kim Childers, the president, chief credit officer and chief risk officer at State Bank Financial in Atlanta.

CRE loans rose 11% in the second quarter from a quarter earlier at the $2.7 billion-asset company. In comparison, C&I loans there fell 7% from the first quarter.

Other community banks reported increases in CRE loans. Bank of Hawaii in Honolulu and Heritage Commerce in San Jose, Calif., also reported more activity involving commercial properties.

Originations tied to commercial and multifamily properties rose 39% from the first quarter and 25% from a year earlier, according to the Mortgage Bankers Association's quarterly survey. (The association did not provide volume amounts.)

"For banks, commercial mortgages can pay a decent yield," says Jamie Woodwell, the association's vice president of commercial/multifamily research. "Property values are also stabilizing and improving, so there's greater certainty about where the underlying assets are going."

Still, CRE activity among smaller banks has been inconsistent in 2012, according to data from the Federal Reserve Board. CRE loan volumes picked up in January, peaking at $842.6 billion in March before edging down to $840.8 billion in June.

CRE lending "is not a segment I'm hearing a lot of from other banks," says Kevin Fitzsimmons, an analyst at Sandler O'Neill.

"Many banks in the Southeast had become overconcentrated in real estate lending…so they're not being as aggressive in trying to re-up those credits," Fitzsimmons says.

But most bankers say they are targeting commercial real estate in much the same way as they are going after any good credit available.

"We've really stepped up our efforts from a sales perspective, and we've hit the streets pretty hard," says Jim Sandgren, regional chief executive at Old National Bancorp in Evansville, Ind. "We've clearly been very aggressive, and as a result, we get more deals hitting the books."

Old National's overall loan portfolio increased by 1% in the second quarter compared with a quarter earlier.

Ryan says growth in the retail and health care sectors have attributed to a pickup in the banking company's CRE business. But those few deals are only with "strong" property owners who have "very strong guarantors," he says.

Childers says that State Bank has also benefited from CRE borrowers bringing low-cost deposits to the company. Historically, C&I clients are associated with higher deposit balances.

Some of the biggest comebacks in CRE lending have involved sectors that have been hard hit in recent years.

Retail-oriented originations rose 56% in the second quarter compared with a year earlier, the MBA survey found. Hotel loans increased 22% from a year earlier. The year-over-year growth in those sectors outpaced that of health care, office, multifamily and industrial properties.

State Bank, meanwhile, is helping some real estate investors buy notes or foreclosed properties held at other banks.

Childers says those clients must have a solid track record and equity partners. The investors buy notes at a hefty discount because of lower property valuations, so State Bank can come in, along with other equity partners, at a lower risk to help rehabilitate and, ultimately, boost the property's underlying value.

"There's an opportunity to reset real estate deals, and this is one way we can help and enable that recovery by providing the funding, in part," Childers says.

State Bank has found success with hotel development, a sector that has also received more interest from other banks. The average loan to a hotel developer more than doubled in the second quarter from a quarter earlier, to $45 million, the MBA survey found.

"Even in asset classes out of favor" with banks, like hospitality, "if you look hard and be selective and deliberate, there are good opportunities to find in that industry," Childers says.

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